Module 3: Financial Statement Analysis

Question 1

T or F: using common size financial statements makes it easier to notice changes in numbers and how significant they are.

Answer 1

True

Question 2

Why do we use common size financial statements?

Answer 2

We often want to compare financial statements to another company (or across time with a single company), but they are usually have different scales (ex: Shakeshack to Mcdonald’s)

Question 3

Common Size Financial Statements: When looking at a number that’s changed, we want to think: ____ has it changed and what does that _____?

Answer 3

Why; mean

Question 4

Common Size Financial Statements: How do we know if the percentage of cash is too high or too low?

Answer 4

Depends on the type of operations we have, type of opportunities we’ve got, etc.

Question 5

Common Size Financial Statements:
What is the method called going through line by line, and noticing the things which haven’t changed that much, and the things we will see bigger jumps on.

Answer 5

Two Finger Method

Question 6

Is there a potential downside to lower costs for sales? If so, give an example.

Answer 6

Yes; maybe we’re getting cheaper parts, which means our products may not be as good in the future

Question 7

If looking at costs compared to a competitor, if their percentage is lower, does that mean we’re less competitive than them?

Answer 7

No, this depends on strategy.

Question 8

For Combined-Common Size and Base Year, for the income statement, _____ _____ will ALWAYS be 1.

Answer 8

net sales

Question 9

What category of financial ratios does this describe?
How comfortable is it for the company to meet its short term obligations?

Answer 9

Short-Term Solvency or Liquidity Ratios

Question 10

Why do we take the inventory out of the Quick (Acid-Test Ratio)?

Answer 10

to give us a better representation of the current assets that we have available to pay down our debt

Question 11

What is the most conservative version: Current Ratio, Quick Ratio, or Cash Ratio?

Answer 11

Cash Ratio (just looking to see how much we can rely on cash)

Question 12

From a lender’s perspective, all of these ratios (current, quick, and cash ratio) being (high/low) is only a good thing to them. Why?

Answer 12

high; means they are more likely to get paid back.

Question 13

T or F: From an investor’s perspective, there is a balance (for current, quick, and cash ratio) : on one hand, we want the company to have enough liquid assets to meet their obligations, but if they have too much cash on hand, we want them at some point to be investing that money, not just keeping it in the checking account.

Answer 13

True

Question 14

If interest goes up, taxes go ______.

Answer 14

down

Question 15

T or F: We don’t want to rely on depreciation to cover our interest expense.

Answer 15

True

Question 16

T or F: The forward-looking PE ratio is nice for investors because they are interested in future profits. However, these are uncertain.

Answer 16

True

Question 17

Why would we be willing to pay more for a company’s earnings than another?

Answer 17

If we know there’s going to be a good return (which there will only be a good return for the more expensive one if those earnings grow faster). If those earnings are always going to be the same, then we should buy the cheaper one.

Question 18

If markets are ______, returns should be the same usually.

Answer 18

efficient

Question 19

T or F: Companies prefer to use price per earnings than to price per sale.
(We may use the price per sale ratio instead because not every company is currently profitable. Making a leap that these sales will turn into profits)

Answer 19

True

Question 20

The Market-to-Book Ratio is commonly used because it’s good at identifying ______ ______.

Answer 20

higher returns

Question 21

a look at the cash flow that flows to all of the investors.

Answer 21

EBITDA